10/19/2009 @ 6:00AM

SEC, FINRA: New Wine In Old Bottles

Recently, reporters have asked me a fairly simple question: Do you believe that any of the proposed regulatory reforms will work?

If you’ve seen me answer that question on television, you likely noticed that I first took a deep breath, my eyes widened, a somewhat sad smile spread across my face, I exhaled, and then I answered, “No.”

Why so negative? Let me point you to the biblical admonition: And no man putteth new wine into old bottles; else the new wine will burst the bottles, and be spilled, and the bottles shall perish. (Luke 5:37)

When grape juice is fermented, yeast converts the grape sugars (glucose and fructose) into ethanol and carbon dioxide. (Bet you didn’t know that before becoming a lawyer, I was the third generation of my family in the wine business.) As the fermentation progresses, the carbon dioxide will build up in the bottle–actually, in biblical days it probably would have been a wineskin–and that gas could burst the bottle. So, when making wine, you want to make sure that the CO2 dissipates into the air and that the fermentation is pretty much completed before bottling … unless you are seeking a wine with petillance (think Vinho Verde) or you are an adherent to the methode champenoise. Ah, now you understand why they use bottles with thicker glass and seal the necks with those mushroom-shaped corks when making champagne.

So, getting back to my skeptical appraisal of many proposed regulatory reforms, it’s just not a good idea to try and ferment new, fresh reforms within the fragile container of an old, outdated institution, such as the United States Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). If we are to enact and implement meaningful Wall Street reform, the vibrancy of those changes will burst the institutions in which they are placed, and both the reforms and the organizations will likely suffer.

While it would be nice to think … to hope … that the SEC and FINRA are flexible enough to adapt to a new regulatory environment, I do not believe that is any more possible than it is for glass to stretch, expand and contract in an effort to accommodate the transformation from grape juice to wine. Some laws can be changed, but not most laws of physics. It is to that latter category that bureaucracies cling with a passion. As they age, bureaucracies become ossified and resistant to any change. Put our venerable regulators under too much reform pressure and they will burst.

To understand my point, permit me a simple example: Job Titles.

At first, you worked at The National Widget Company; in fact, your father worked there and so did a lot of your neighbors. National Widget was a decent place to work at. They paid a fair wage. The boss was a good man, and everyone seemed to pull together. One day it started to change. It was about the time that the old man brought in his son with the MBA from that Ivy League school.

For years you worked at the factory. That’s all anyone called it: the factory. Pretty soon, the kid started separating folks into departments, then divisions, then national and international regions, and then product groups. The factory became a maze of turfs and petty kingdoms. Then the old man retired–maybe he was, officially, the CEO or President, but everyone knew him as the old man, the boss. He had earned your respect and no high fallutin’ title was necessary.

The kid had other ideas. Soon there was a company handbook that listed all the new units and executive titles. There were vice presidents, but they were divided into senior vice presidents and executive vice presidents; and it got worse: Deputy this and special advisor that and senior so-and-so and Chief Pooh-Bahs and even a special deputy senior advisor to the deputy chief senior special advisor to the senior director to the senior vice president for the associate advisor to the co-acting CEO of the North American Regional Markets Division of NatWidgCo. NatWidgCo? What the hell was that all about? One day, you came to work and saw the new logo all over the place–trouble was, no one could figure out what it was.

It was about this time that you noticed that nothing seemed to get done at the NatWidgCo and no one seemed to be in charge. NatWidgCo was on the verge of collapse from too many layers of feuding managers and too many departments that seemed unconnected from a common company goal. Just before you left, you heard that NatWidgCo had hired a special consultant to re-brand the company’s image and to develop a corporate mission statement. There was talk of a consumer focus group coupled with an industry Roundtable. They announced the closing of the factory because the widgets were going to be made in China.

That is the prism through which I see modern-day America. We’re losing touch and losing control. We’ve abdicated too much to bureaucrats who are enamored with titles and to politicians who can’t seem to keep it in their pants. And amidst this mess we are supposed to expect that the SEC and FINRA are magically going to reinvent themselves into meaner, leaner, more effective Wall Street cops?

For starters, please read this 2006 article that I wrote chastising the then NASD (FINRA’s predecessor) for posting a help-wanted notice for one of the more bizarre jobs I have seen: New NASD Job Available. You truly have to read that article to appreciate how silly things got (and still get) on Wall Street’s regulatory scene. Four years ago, when NASD was hot on the trail of Stanford Financial and Bernie Madoff and all the other percolating frauds that were soon to erupt (What–you don’t think that NASD or FINRA were hot on the trails? My, how cynical of you), that regulator decided to hire a director of its member regulations office. To give you just a tease of the nature of that job, consider this quote from NASD job posting:

Major Purpose of Job:

The director, member relations, assists the vice president of member relations with all aspects of the department’s operations including but not limited to–facilitate effective feedback loops between member firms and NASD departments to affect positive change.

No, not Fruit Loops but feedback loops. What are “feedback loops?” Oh, well now you’re just getting silly. Everyone knows what feedback loops are and why you need to facilitate them in order to affect positive regulatory change. Say what? You don’t speak the language of regulation? Well, OK, go online and order a Wall Street to English dictionary. However, I don’t want to make fun of the serious work of regulation during the past decade. Seriously, you should go read the article and reach your own conclusion.

When you’re done reading about the NASD’s Member Relations Office Director, then visit the SEC’s Recent Press Releases page. Here is a sampling of employment releases issued by the SEC during 2009. I’m sure you will be impressed with the fabulous sounding titles and departments.

Feb. 5, 2009 Robert Malhotra Named Senior Advisor in SEC Office of the Chief Accountant

While you’re perusing the impressive laundry list, maybe you can answer a few nagging questions.

–What does an Office of Investor Education and Advocacy do, and why was there a need for such an office when the SEC’s core mission was supposed to be to protect investors?

–How many Directors and Associate Directors does it take to replace light bulbs at the SEC–do they need a requisition slip signed by a Chief for that?

–Could the taxpayers save money by eliminating all “senior” policy advisor titles and just call all such folks policy advisors?

–Isn’t it a lot of work for one individual to be counselor to the chairman AND director of the Office of Legislative and Intergovernmental Affairs–and what is that latter office doing anyway? I see that the SEC also named a deputy director of legislative affairs. Is the SEC getting overwhelmed with legislative problems?

–What’s a fellow and how much do they earn, and where can we apply for that job?

–How long is someone a co-acting anything? Is there a dress rehearsal for that slot, and do you get your name in the playbill?

–Why does the SEC need a chief of staff–is the regulator going to war?

Bill Singer of BrokeAndBroker.com is a veteran regulatory lawyer; an outspoken critic of ineffective regulation; and a staunch advocate for the rights of smaller firms, individual registered persons and defrauded investors. Bill regularly appears as a commentator on television and radio, and is frequently quoted in the press.